Troubling Proposal from NCUA

The National Credit Union Administration is proposing that an FCU will be required to develop and maintain a written plan if its public unit and nonmember shares, taken together with borrowings, exceed 70 percent of paid-in and unimpaired capital and surplus.

This proposal ignores that the reliance on volatile and expensive nonmember deposits and borrowed funds could expose the National Credit Union Share Insurance Fund (NCUSIF) to a loss.

For example, Beehive Credit Union, which failed, held up to 18 percent of its deposits in high-cost nonmember deposits. The Material Loss Review of this failure noted that these high-cost nonmember deposits partially contributed to the $27.6 million loss to the NCUSIF.

According to the Material Loss Review of Chetco Federal Credit Union. the credit union's management failed to develop an adequate liquidity plan to address rapid loan growth. The report noted that management funded its rapid loan growth through a combination of borrowed funds and deposit products with above-market rate. But as Chetco's financial condition deteriorated, a corporate credit union reduced its line of credit, subjecting the credit union to liquidity risk. The failure of Chetco resulted in an estimated loss to the NCUSIF of $76.5 million.

The NCUA Board should require all FCUs to develop and maintain written plans when an FCU is relying on high-cost, volatile nonmember shares and borrowings to fund its operations above a de minimis threshold.